McDonald's Rallies Into Resistance After Bullish Earnings

Shares of Dow component McDonald's Corporation (MCD) traded higher in Tuesday's pre-market after the company beat third quarter earnings and revenue expectations. Revenues fell nearly 7% year over year, which was anticipated in the company's previously announced strategic refranchising initiative. Global comparative sales rose 4.2%, highlighting the power of fast food appetites to overcome political headwinds.

The stock hit an eight-month high earlier this month and reversed at $172, which is perfectly aligned with a hidden Fibonacci resistance level. This morning's buying wave is testing that harmonic barrier, setting up a major inflection point that will play out in the regular session. Traders should look for a breakout to open the door to a long-awaited test at the bull market high near $179, while a reversal risks a decline that brings the eight-month trendline of rising lows in the mid-$150s into play.

MCD Long-Term Chart (1999 – 2018)

A vertical decline during the October 1987 crash ended at a split-adjusted $3.92, marking a historic buying opportunity ahead of a powerful trend advance that reached the upper $40s in March 1999. The stock tested that level in November and turned sharply lower, falling more than 75% into the 2003 low in the lower teens. The subsequent recovery wave reached the prior high in April 2007, just in time for the end of the mid-decade bull market.

McDonald's shares broke out in September and stalled in the mid-$60s, grinding sideways above new support throughout the 2008 economic collapse. This resilience encouraged healthy buying interest when the broad market turned higher in 2009, yielding a 2010 breakout and uptrend that posted impressive gains into the 2012 high near $100. The stock spent nearly four years stuck below that resistance level, finally breaking out in October 2015. The uptrend escalated following the 2016 presidential election, reaching an all-time high at $178.70 in January 2018.

Price action since August 2015 has carved four waves of a possible Elliott five-wave rally pattern, raising the odds for a rapid advance if buyers clear stubborn resistance in the $170s. This long-term bullish scenario will remain in force unless the stock sells off through $130, which marks the top of the potential first wave. April 2017's unfilled gap between $135 and $138 could attract a magnetic bid if sellers prevail in the coming sessions, also bringing the top of that wave into play.

MCD Short-Term Chart (2017 – 2018)

A decline into March 2018 found support at $147, generating a quick bounce, followed by months of base-building between $150 and $170. A June buying impulse ended at the .786 Fibonacci sell-off retracement level near $172, while an October uptick suffered an identical fate, setting the stage for this week's earnings release. That level is now in play for the third time, suggesting that the conflict will end quickly with a surge into the upper $170s or a decline into the $150s.

The on-balance volume (OBV) accumulation-distribution indicator hit an all-time high in April 2018 and turned lower in an orderly distribution wave that looks like position squaring rather than fear or a lack of commitment. However, it has barely budged since June, predicting that more buying power will be needed to support a healthy breakout into the $180s. That may not be in the cards, given October's broad-based retreat.

The Bottom Line

McDonald's has rallied back to resistance at $172 following a well-received third quarter earnings report, and the stock needs to clear that level during the regular session or risk a reversal that could reach the $150s in the coming weeks.

<Disclosure: The author held no positions in the aforementioned securities at the time of publication.>

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